What Is a Bitcoin Wallet? — The Motley Fool

Bitcoins may not come in a physical form, but you still need a place to store them — someplace where only you can access them. That’s where a bitcoin wallet comes in. A bitcoin wallet is a software program that stores the record (aka private key) of every bitcoin you own. Bitcoin wallets come in many different forms, and it’s important to understand them — and how to keep them safe — before you even start buying bitcoins.

Types of bitcoin wallets

While all bitcoin wallets serve the same function, they come in different types that have various access options and levels of security. Generally speaking, the most easily accessible options are also the least secure ones (after all, easy access extends to both fraudsters and yourself).

A hardware wallet is one of the most secure options, and it’s a good choice for storing the bulk of your bitcoins. A hardware wallet is a physical piece of equipment designed specifically for storing bitcoins. Because hardware wallets can’t have additional software installed in them, you don’t have to worry about getting a malware infection that will allow a scammer to suck the bitcoins right out of your wallet. On the other hand, you must have access to the piece of equipment to use it, and you’ll definitely want to back up your wallet in case the hardware is lost or damaged.

Unlike most types of bitcoin wallets, you’ll have to spend money to acquire a hardware wallet — typically anywhere from $75 to $200. Hardware wallets usually attach to your computer via a USB port. For an even higher level of security, only plug the wallet into your computer when you’re actually making a transaction.

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A desktop wallet is a software program installed on your computer’s hard drive. It’s not as secure as a hardware wallet, because a hacker who breaches your computer’s security could also gain access to your wallet, but it’s more secure than the other common types of bitcoin wallets. Unlike hardware wallets, desktop wallets are usually free (aside from transaction fees, which are unavoidable). As the most common type of bitcoin wallet, they also have the widest range of features and options. Some prioritize simplicity and ease of use, while others are loaded with options for Bitcoin power users; review the features carefully before selecting your desktop wallet to be sure you have one that will suit your preferences. Choosing a strong password can help keep your desktop wallet secure, and you’ll also want to back it up regularly in case your hard drive goes bad.

Web wallets are hosted on a server somewhere else, rather than on your own computer. Because Web wallets are remote, you can access them from any computer; however, that makes them more vulnerable to hackers. You’re also relying on whoever is hosting your wallet to keep it secure, so if you choose a Web wallet, investigate the provider carefully before signing up. On the other hand, you don’t need to worry about backing up a Web wallet, as any problems with your own computer won’t affect the wallet. Like desktop wallets, web wallets are usually free except for transaction fees.

Mobile wallets are the newest kind of bitcoin wallet. They’re simply a wallet in app form, and you’ll find them for every type of mobile operating system — even BlackBerry. Because storing an entire bitcoin transaction takes a significant chunk of computer memory — more than most phones can comfortably handle — mobile wallets typically only hold a portion of each bitcoin transaction and use an external source to provide the rest. That, plus the fact that if someone steals your phone they could also have access to your bitcoins, makes mobile wallets the least secure option. In fact, a security firm uncovered several malware packages masquerading as mobile wallets in the Google Play store, which highlights the need for caution when downloading and using this type of wallet. If you decide that the convenience makes a mobile wallet worth having, consider keeping only a small percentage of your bitcoins in that wallet and keeping the bulk of your funds in a more secure location.

Keeping your wallet safe

If someone hacks your bitcoin wallet, or if the information is damaged or lost, you could be wiped out. It’s important to protect your wallet from the most common dangers, just as you’d be careful with a physical wallet stuffed with hundred-dollar bills.

First, choose a strong password for your wallet. Strong passwords are at least 12 characters long and have a combination of upper- and lowercase letters, numbers, and symbols. It’s also a good idea to use different passwords on different sites and programs, so if one of your passwords gets cracked, the hacker doesn’t have access to your entire life.

Second, keep your wallet software up to date. Responsible wallet-providers will regularly roll out security updates and other software changes to make your wallet function better, and installing these patches as soon as they’re available will help protect your bitcoins.

And finally, if you use a desktop or mobile wallet, make sure your computer or your phone is also well-protected. For desktop wallets, set your computer to require a password on login; smartphones can be protected by fingerprint identification and/or passwords. If you make it hard for hackers to get to your wallet at all, you’re much less likely to lose your bitcoins.